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Originally published Saturday, July 30, 2005 at 12:00 AM

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Seattle market: Distorted prices — or room to grow?

Some say the area's housing market is overpriced, a bubble soon to burst. Others are sure prices will keep rising. Whom to believe? Good question.

Seattle Times staff reporter

Seattle's home-sales market is a little like red wine. Whether it's considered healthful or not depends on which expert is doing the talking.

Most recently, it's been, which just rated Seattle the "most overpriced" place in the country — for the second year in a row, no less — beating out such high-priced contenders as San Francisco (ranked seventh) and Los Angeles (ninth).

This follows an assessment by nationally regarded real-estate economist Lawrence Yun that Seattle, with a median home price of $372,000, is actually underpriced among West Coast cities.

Then there's the matter of a real-estate bubble.

Veteran Seattle real-estate agent Don Henry is certain the rapid run-up in home prices has put Seattle into bubble territory.

"There are just so many people out here who can continue to sustain these increases," Henry said, particularly when wages aren't keeping up.

Not so fast, says Seattle real-estate economist Matthew Gardner.

"You've got people saying, 'housing bubble, Chicken Little, the sky is falling,' " he said. "It isn't, and I don't think it's going to fall in Seattle."

But wait. Remember Yale University economist Robert Shiller? His 2000 bestseller "Irrational Exuberance" foretold the bursting of the stock-market bubble.

Now Shiller is saying America's real-estate fever has no sound economic basis and thus is ripe for a correction.

With so many conflicting opinions and facts flying, just what are homeowners and buyers to think? And what, if anything, should they do about it?

The housing market is a volatile topic for sure, one that features dueling statistics, analyses that may rely on questionable data, and — let's face it — a generous helping of media hype.


"Obviously we've got a tremendous amount of media attention focused on real estate, and all of that attention simply breeds more attention," said Glenn Crellin, director of the Center for Real Estate Research at Washington State University. "There's some feeding frenzy out there hoping to create a bubble in some sense, a terminology and implication I simply don't buy into."

At the top

Forbes rated Seattle the most overpriced of 150 business-friendly cities after studying job and income growth and the cost of living, which includes housing costs.

Added in was a "housing-affordability index" created by, an economics-consulting firm in West Chester, Pa. The index measures how close buyers earning the median local income can get to buying the median-priced house.

"Seattle, once again, took the highest spot on our 'overpriced list' because it's still recovering from the blowout five years ago," Forbes reported.

The word went out on CNN. It ran in The Christian Science Monitor. A Seattle real-estate blog reported it, and it earned the cover-story spot on's money page.

But various economists, local and otherwise, aren't buying it.

"They put together a hash of statistics, and they don't all go together," said economist Dick Conway, co-publisher of the Puget Sound Economic Forecaster.

Said Gardner, a principal in the Seattle-based land-use economics firm of Gardner Johnson: "The problem with their methodology is simple. It's inherently backwards-looking."

Big surprise

Even's chief economist, Mark Zandi, whose data Forbes used, was surprised Seattle ranked last in affordability "because it's not, at least by our criteria."

"There are many markets I consider less affordable in California, Florida and the Northeast," Zandi said.

In fact, Zandi's firm ranks Seattle the 47th least affordable of 379 metro areas.

Rather than still suffering the after-effects of the blowout, Conway said "Seattle is now growing 50 percent faster than the U.S. economy" in terms of job growth. It also posts the nation's fifth-highest per-capita income, which is what allows buyers to afford home prices that have climbed 12.1 percent in the past year.

Conway points out that this gain mirrors rather than exceeds the national average, which is 12.5 percent.

Still, there may be clouds on the horizon that could lead to a repeat of Seattle's last real-estate cool-down.

Peek at past

Don Henry, a Prudential Northwest Realty agent, remembers that time well. After languishing through much of the 1980s, prices took off in 1988. In 1990, they peaked in a frenzy of multiple offers and price run-ups much like Seattle is experiencing these days.

Then, seemingly without warning, the market stalled the next year. In half of King County, prices rolled back.

Mercer Island was one of the more dramatic examples. In 1990, the median price per square foot reached $140, according to a Seattle Times analysis. The next year it dropped to $126.

That meant a 2,000-square-foot Mercer Island house that was worth $280,600 one year commanded $251,520 — or $29,080 less — the next.

The scenario was repeated in area after area. Some owners who had to sell took a loss, Henry said.

"They were extremely disappointed, but there was nothing they could do," he said.

However, about half of King County's areas didn't dip in 1990.

Almost invariably, they were neighborhoods like Federal Way, which never experienced that late '80s surge in buyer interest. Federal Way had gradually rising prices every year during the 1990s.

More recently, when the stock-market bubble popped, many glamour stocks saw their value cut in half or worse.

"My big concern with all the talk about a real-estate bubble is the image in the consumer's mind that it's 'here today, gone tomorrow,' " Crellin said. "But that's not the way real-estate markets act."

Better analogies, Crellin said, would be of a car slowing from 70 miles an hour to 50, or a balloon slowly losing some, but not all, of its air.

Said Gardner: "With the stock-market crash, people could call their broker or jump online and sell immediately. You can't do that with real estate because it's a relatively illiquid asset."

Higher rates

Still, economists agree that rising interest rates, which translate to higher monthly payments, could cool the frenzy.

Earlier this month, Federal Reserve Chairman Alan Greenspan said a rate increase is necessary to maintain strong economic growth. Policy analysts say that could happen in August or September. (Or not. Previous predictions have not always come true.)

Rapidly rising prices, which erode affordability, also could slow the market. Crellin, who compiles a housing-affordability index, said that in the last six months, local housing has become "modestly less affordable" than the 20-year average.

"It's become a problem for first-time buyers and not as big a problem for repeat buyers yet," Crellin said.

By his calculation, a first-time buyer earning the median wage in King County has just half the income needed to buy the median-priced house. Repeat buyers earning the median have 90 percent of the income needed to buy the median-priced house.

So what should homeowners and buyers take away from all this?

For buyers looking for a place to live, a cautious approach to borrowing. The increasingly popular adjustable-rate, interest-only loans could leave buyers with no equity and with house payments they can't afford, Gardner warned.

"It won't take too much of an adjustment upward [in interest rates] for these people to be in trouble," he said.

For buyers jumping into the market as investors, an equal word of caution.

"Investors, unless they're really lucky or really smart, are going to get burned if the market goes flat," said Zandi, who considers jumping in now "a silly thing to do."

Homeowners OK

Homeowners, on the other hand, have little to fear because "for the average homeowner, this discussion is largely academic," Zandi said.

"If you think you're going to have to sell, you might want to sell sooner rather than later because it's a very good time to be a home seller," he said.

Otherwise, owners can simply do what so many others did during previous downturns: wait for better times.

Remember the example of that Mercer Island house that on paper dropped $29,080 in value from 1990 to 1991? Its owner today would be sitting pretty in a house worth about $566,000. That's more than double its 1990 high.

Elizabeth Rhodes:

,strong>Most overpriced vs. riskiest's annual list of the 10 most overpriced places is based on rankings for job and income growth, the cost of living and the ability of buyers making the local median wage to afford a median-priced home. Kiplinger's Personal Finance Magazine released a list of the riskiest housing markets. Only three places are among the top 10 on both lists.
1. Seattle 1. Boston
2. New York City 2. New York City
3. Portland 3. Fort Lauderdale, Fla.
4. Chicago 4. Washington, D.C.
5. San Jose, Calif. 5. Detroit
6. Bergen-Passaic, N.J. 6. Los Angeles
7. San Francisco 7. San Francisco
8. Middlesex, N.J. 8. Sacramento, Calif.
9. Denver 9. Providence, R.I.
10. Los Angeles 10. Minneapolis-St. Paul
Source: Forbes, Kiplinger's

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